Abstract/Summary

Cambodia’s rapid economic growth over the past two decades has been driven primarily by structural transformation, as labour shifted from agriculture to higher-productivity jobs in manufacturing and services. However, the country’s growth model—dominated by garment manufacturing, tourism, and construction—is now facing limitations, necessitating a shift towards a more diversified and resilient economy. This report explores pathways for economic diversification in Cambodia, identifying key constraints and opportunities to foster sustainable and inclusive growth.

The study underscores the importance of economic diversification in enhancing Cambodia’s competitiveness and economic complexity. Diversification also reduces dependency on a few sectors, improves resilience to external shocks, and facilitates the production of higher-value goods and services. The report applies an economic complexity framework and product space analysis to identify viable diversification pathways, drawing on case studies from ASEAN and beyond. It highlights that Cambodia’s slow transition from garment manufacturing to more complex industries, such as electronics and automotive production, is due to constraints in both knowhow accumulation and competitiveness.

More specifically, competitiveness constraints include uncertain and inconsistent regulatory enforcement, high logistics and energy costs, and a skills gap in technical and managerial roles. Knowhow accumulation is constrained by weak linkages between domestic and foreign firms (especially export-oriented manufacturing firms). Despite attracting significant foreign direct investment (FDI), much of it has not contributed to industrial diversification, as foreign firms primarily operate in enclave-like structures with minimal technology transfer to local firms.

To address these challenges, the report identifies two primary diversification pathways: (1) transitioning from agriculture to agro-processing; and, (2) expanding from garment manufacturing into electronics, automotive, and machinery production. Agro-processing offers a “low-hanging fruit” approach, leveraging Cambodia’s existing agricultural base to develop higher-value food and agricultural products. Meanwhile, electronics and automotive manufacturing present a more strategic opportunity to integrate into global production networks and enhance Cambodia’s economic complexity. The study also emphasises the potential of “green industries,” particularly in electric vehicle component production.

Policy recommendations focus on targeted government facilitation, FDI promotion, industrial policy, and enabling environment reforms. Key measures include targeting FDI incentives to pioneer firms in priority industries, improving the investment climate for strategic industries, strengthening linkages between local firms and multinational corporations, expanding skills-based immigration, improving certification services and other quality infrastructure, and leveraging SEZs for priority industries.